What Is Automated Forex Trading?

The Forex market is larger than the stock market.

If you combined all the stock markets of the world, the Forex market would still be 10 times larger. Forex, also called "FX," is foreign currency exchange. Forex traders speculate on the value of a currency and place trades that represent bulk quantities of currency units. The Forex market is 24-hour, highly liquid and highly leveraged. This makes it a logical candidate for automated trading.

Automated Trading

Trading in any market involves the buying and selling of instruments. These may be stocks, futures, options, bonds, Forex or other entities. Many traders place their orders themselves, in real-time, when they believe prices have become favorable for the trading strategy they use. Automated trading places orders based on computer algorithms. There is no real-time human interaction. The human involvement relates to programming the algorithms with particular strategies. Once the programs are created, the computer is put to work to buy and sell instruments based on specified criteria.

Forex

Any currency only holds value when compared with another currency. They do not have intrinsic values. The U.S. dollar may rise in value against the Canadian dollar while simultaneously falling in value against the Euro. When traders engage the Forex market, they trade in "currency pairs," which include the base currency and the currency used for valuation. The purchase price for a currency pair is the same as the exchange rate between the two currencies.

Leverage

Changes in exchange rates are minute. Leverage allows a trader to purchase many more currency pairs with her trading capital than the simple exchange rate provides. In the United States, this leverage can be up to 100 times the normally allowed transfer of currency pair units based on the exchange rate alone. Thus, an account with $10,000 of trading capital could purchase up to one million dollars of a currency pair. This allows traders to capitalize from small fluctuations in Forex pricing.

24-Hour Market

A particular advantage to automated Forex trading is the ability to capitalize on strategic trading opportunities that would otherwise be missed due to sleep and other activities. Day traders of equity products, such as stock, work during normal business hours, as this is when the stock exchanges are open. But Forex has no set schedule, thus the important moves in a currency pair could happen at any time. An automated platform will capture these events and, with strong leverage, could result in consistent daily or weekly profits.

Detached Emotions

Even when a trader has the time to trade herself, automated trading can be advantageous. The psychological challenges associated with active trading are often the bottleneck that prevents a trader from succeeding. Stress is high in the trading profession, and automated trading reduces or removes most of these problems. In addition, automated trading allows programmers and other personality types to participate in active trading when they might otherwise not consider this line of work.

References

• Go Forex: Forex Market Overview
• TradeStation: The Advantages of Automated Trading